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Friday, March 06, 2009

Whatever happened to Pollyanna?

Where is she? For the past four-five years I and many others of similar mind have been called every name in the book for daring to express the view that there just maybe, perhaps, might be some kind of "housing bubble". If I had a buck for every used house salesperson who assured me that "this is the bottom", well...

The real reason I started this thread is because of accountability. Yes, accountability. For the first time in history we've experienced an episode that has been well documented in a democratic, not-easily-corruptible manner. Because of blogs like this and thousands others, there can be no claim that "no one predicted all this". Not that any of us had the entire picture -- we did not. But in aggregate, a small group of internet "bloggers" seem to have predicted the current state of affairs with striking accuracy.

And what of all the blurry eyed optimists? Well, not only do we have their comments of record in blogs and other extracts, preserved in the web's wayback machine for eternity. But we also have thousands of hours of video documentary in the form of youtube and metacafe and others. Here we can see what all these pundits, shills and outright con artists have said over the years. We can watch the "economists" from the NAR lying quarter after quarter after quarter in the face of overwhelming evidence contrary to their rosy view of a "spring rush in 2007!"

Not that I'm going to hold my breath, but I'd love to hear from some of those who attacked me and others on this blog so viciously over the years. Your comments are now on the record. But where are you now? I'm still here, as are many of my readers and commenters. But you, the Pollyannas, where have you gone?

I'm not even interested in the blissfully hopeful. I can respect that. In a way, don't you wish you were able to just be happy and ignore reality? Sometimes I know I do.

I'm more interested in the people who leveled analytical (ok, usually pseudo-analytical) arguments. Like the guy who tried to take issue with Case Shiller because it started in 1890. He was determined that somehow invalidated the usefulness of the method. Or the realtor guy who attacked my affordability articles on the Bay Area. He was full of data and logic. I'll even settle for the more macro bulls who insisted such a wide-spread downturn in housing could never occur for sundry reasons.

Where are they all now? We have your broken arguments in our blogs, but where are you? C'mon. At least come by and make a feeble attempt at post hoc reasoning. You know, "I woulda been right if not but for _____".

Seems to me Santelli is the non-partisan and Cramer is just a self-promoting jergoff. By the way, Cramer is still stomping around forcing the bad housing policy plans of this administration down everyone's throats. --But you're right, he is "non partisan", in a narcissistic sort of way.

I haven't seen any economic pollyannas yet (lots and lots and lots of political pollyannas though). The eight years of credit fueled boom seems to have divided everyone into either someone who saw it coming for years or someone who insists that no one could have seen it coming. I suspect the pollyannaism will come from Obama's policy in 6-24 months, depending on how things are at that point.

I will admit now that I was wrong about the bank bailouts -- I was reluctantly for it, now I'm just sick of seeing more bailouts and zero remorse from the bankers. Whatever the cost of the complete bank implosion, we would have gotten over it and can then start to rebuild. Right now, we're just feeding these ungrateful monsters more and more, while hearing them bitch about the government's horrible bailout terms.

They should have nationalized the banks from the beginning. Pretty much every economist, as well as the IMF is saying that. And the IMF isn't exactly known for socialist leanings (they're usually roundly criticized for spreading American-style capitalism with a vengeance).

It's funny, I think Obama & Geithner misread the nationalization option. The politicians have turned it into a third-rail when the people wouldn't have cared that much. I know the ideological faux-right would have caterwauled, but they do that about everything these days. I actually think this is a case where the left was too wimpy and afraid to be labeled socialists the one time they should have socialized. Jeez, I mean there isn't a single legitimate economist to be found who says anything other than nationalize. Volcker. Mankiw. Hubbard. These guys aren't exactly folks you'd normally charge as socialists. Hell, even Roubini is saying nationalize.

As for GK, s/he is usually ok, though the comments tend to thinly mask partisan rhetoric. But since I set down some rules last November s/he has followed the rules of the board. Dissent is welcome and encouraged, so long as it's mature, reasonably well informed, and intellectually honest.

The head of the RBA, Glenn Stevens, recently claimed 'nobody could have seen it coming', despite the fact that plenty of commentators were warning something was rotten in the state of Denmark (or perhaps Iceland). Even patrick.net saw it coming. Steve Keen, Prof of Economics at UWS, responded to this claim in his blog reply 'I do not know anyone who predicted this course of events…'-- http://www.debtdeflation.com/blogs/2008/12/10/i-do-not-know-anyone-who-predicted-this-course-of-events/ as someone who had predicted the course of events.

Keen's debt deflation blog is well worth a read in general if you like charts and 'critical economics' - http://www.debtdeflation.com/blogs

I don't think we were thinking of CDS and high leverage though, just plain ole bad MBS. The crisis we anticipated is a somewhat different animal than the one that showed up. Very few people actually understood the degree of leverage undertaken by the bulge bracket banks and hedge funds. We thought I-Bankers and hedgies were smart enough to avoid stupid risks...oops!

(Though Roger Lowenstein's When Genius Failed is absolutely prophetic wrt the current mess)

"Heads they win, tails we lose" is not the result of an "unfettered capitalist system". It is the result of a dishonest system that only practices capitalism-of-convenience.

You seem intent on tying this disaster to a failure of capitalism, when in fact it is a failure of policy, not ideology.

I hear a lot of ruminating coming out of the left, all excited that somehow they can put a stake through the heart of evil corporate capitalists these days.

Sorry, but I see that as just as dogmatic as the partisan shots fired by GK earlier.

Is it possible that nationalizing the banks doesn't mean we're collapsing into some sort of socialist purgatory, and that whole thing is not a failure of capitalist excess? Those positions go a long way to explain something more simply stated as a failure of policy and ethics -- a failure which saw no political or ideological boundaries, I might add. Left, Right, Democrat, Republican, even Neo-Libertarian all marched in the parade so long as they were allowed to enter their float.

Enough. Let's get to some solutions and quit arguing about what color the sky is where you're sitting.

So that's what separates me from the more Libertarian view of Capitalism. I agree with you in principle. But in practice that sort of Capitalism cannot survive more than a fairly small group. This is even true within a single company, let alone within a nation state.

In reality, I advocate Objectivist Capitalism, which is very pragmatic. The missing piece is *policy*.

Capitalists _should_ and _must_ protect their system from feedback loops which result in systemic failure. But (and this is the most important part) that policy must serve the basic principles of a fair, merit-driven society. No more, no less.

An example which is directly relevant here has to do with regulatory failure. Regulation is not anathema to Capitalism. It is, in fact, necessary. Capitalism cannot operate in the face of coercion, which is one of the basic principles of a fair society -- a market cannot operate under coercion.

Where *we* failed as a society was with policy which either addressed unnecessary goals, or ignored essential ones.

But I do not agree with you that we need to allow "massive" failures to protect Capitalism. In fact, those failures will do more damage. They are not compatible with the ideal of creative-destruction. Again, value is created by destruction *only* when allowed to occur in an environment free of coercion, and rewarding of merit.

Another thing, without following the tangent, is that rewarding *merit* is not the same thing as rewarding *risk*. We should never reward risk, only results. Risk will be naturally rewarded because only those bold, clever, and sure enough will dare tackle the riskiest endeavors, and therefore they will be rewarded the greatest through the function of the market. Our modern financial system has subverted a lot of this equation and rewards volatility directly without demanding productive merit as a result of enduring that volatility.

There is a big difference between being a Capitalist and an Opportunist. A Capitalist endeavor creates value. Opportunists can sometimes sap value. A free market would punish the latter and reward the former. Our "capitalist" system rewards the latter disproportionately.

I don't actually believe our current market economy is free, or that any functioning market economy could be completely "free". I was just trying to see how far Peter was willing to follow his claim.

I'm not blaming the bank failures and RE bust on the capitalism per se. I've lived under a Communist country and I don't want to go back to that. I'm blaming the bank failures and RE bust on a combination of bad deregulation, esp. under Clinton and Bush II, with overwhelming bilateral support. I'm blaming it on a lot of regulators who were asleep at the wheel or worse. I am blaming it on Republican lawmakers who talk just like Peter P.

I'm not sure where you're seeing this wave of lefwing rumination about the end of capitalism. I don't see it in the mainstream progressives. They want to curtail the excesses of Bush II, maybe even some of the Reagan/Bush I/Clinton, but I haven't heard anyone call for nationalization of non-bailout industries, the return of 90% marginal taxation, or making East Hampton beach homes into worker's vacation dachas :-)

Wouldn't you consider Mother Jones and Utne Reader to be representative of the "mainstream Left" (if there is any such thing -- I actually think the Left is almost entirely unorganized, especially when compared to the Right). Certainly they are more influential and more widely representative than Kos, etc. Bear in mind that even among the more lefty-left of the Internet/blogosophere, they tend to be much more libertarian than the public-at-large.

Another gauge is the books at Borders. If you browse within the business aisle you'll see recent titles tend to be analytical, with some "left or right/lib" bias. If you browse new & hot titles in the main area, you find an almost unanimous verdict that Capitalism, banking, and corporations are the villains that brought this upon us all.

I think that's striking a particularly populist chord these days, and I eschew populism regardless of which extreme it comes out of.

Hopefully because we've already all agreed that a flat tax won't work, isn't fair, and is a small-minded attempt by neo-libertarians to just get themselves out of paying taxes. Use-tax is the fairest, most merit-driven, individual-rights-preserving, not-rewarding-the-lazy-and-stupid way to go.

In reality, neither will happen in my lifetime, so it's a moot discussion.

I have to preface my comment by telling you: My great grand Bubbe adores you, she lost her sight last year at 98 and makes me read aloud every comment you make.

She would like to know what fostered your initial interest in this subject...Could I trouble you to direct me to a post outlining why you started writing about this subject? I have been following you for years and feel I know, but I'm asking because she isn't satisfied with my answers.

I don't think there is an actual post or article anywhere which describes what brought me to this subject. I started this blog in 2006, though a lot of my earlier stuff was of more varied economic and entrepreneurial topics.

I'm not sure anyone has interest in reading an autobiography on me, so I'll keep it short:

I was a firsthand witness to the dot-com carnage, and I was very affected by 2 bubbles in short succession. First the dot-com and then shortly after the (in my opinion worse) telecom-bubble. I also am old enough that my young career was born in 90-91 recession, so I was very concerned that these two, massive, terrible bubbles seemed to only have the effect of triggering a giant real estate bubble.

I gained the formal education to analyze, evaluate and write intelligently about the real estate bubble shortly after that when I went back to school to get my MBA. I had the fortune of being able to get into a dual-program with two of the top schools in the world where I was able to indulge my passion for finance, economics and capital markets.

We sold our home in 2005, though that itself wasn't because of my immersion in real estate economics. Like everyone else, we had to move for real reasons, in this case my wife's career took us up to Marin County. But, all this analysis and research I'd done on the real estate bubble enabled us to decide to *not* buy back in until after things imploded.

You know the rest of the story -- mine is the same of most others who read and post here and on other similar blogs. We're waiting it out for one reason or another; waiting for sanity to return.

I have been poking at other bubbles when I see them. The biggest example I can reference is contained on this blog in the form of my work in "Virtual World Economics". Namely the "Second Life" bubble. That was a fiasco where I did similar analysis, some actual first-hand testing and research, and then wrote one of my typically jerky articles about what BS the whole thing was. That ignited a firestorm like I never could have imagined, and it still drives about 80% of the traffic I get on this blog. I get an average of 10-hits per hour on those articles even now, years later.

Maybe I could have answered this all much more easily: I've always been a bit too much of a contrarian for my own good.

Out of curiosity, I just scanned back into that silly Second Life economy world (by seeing where referrals to my site are coming from in the logs). What do I find right off?

"Metaverse Investment Fund", claiming it's returned 55.67% since February 2008. For some reason that site is referencing my articles. I couldn't find why, but probably to show what a fool I am.

Uh huh. Sure. You guys are making 56% returns in an entirely unregulated market full of anonymous actors, no forced accountability, no standards for reporting on financials or capital markets, and few skillful operators (of businesses or funds). Sure.

But hey, they've paid out L$1,167,711.37 worth of dividends! Yippee! (for homework, figure out how many dollars that is, lol -- and it's among some 500 "accounts", half of which are probably fake).

LOL! Those SLers should look into a savings account with a Zimbabawe bank. I'm sure they can get 100+% annualized "appreciation".

A use-tax universe, particularly a carbon-based tax system, would be nice -- it would definitely be the most green tax policy, far more so than sporadic government subsidies for purported green objectives (ethanol comes to mind). Too bad that it is be politically impossible.

There isn't any that i am aware of or could otherwise find. I imagine that with absolutly no taxes a goverment would be doomed to failure. If a goverment did survive, there would be deflation without an indirect tax on the currency, inflation.

I was a little short with my earlier comment. I was implying, unkowningly at the time, a Utopia. No tax, no govt, no human condition?

Obama administration's actions for the past few days have been painful to watch. First it's revealed that Tim Geithner essentially okayed retention bonuses for the guys who imploded AIG. Then the IRS decided to reward Madoff "victims" with a big tax write-off, complementary of Joe Taxpayer. And now I learn that the Fed is openly printing money supply out of thin air.

Meanwhile, where the hell are those "shovel-ready" projects that will build much needed infrastructure and nationalize healthcare? Where are the regulations that will prevent these "too-big-to-fail" situations in the future? Where are the much deserved and much needed pummelling of Wall Streeters who got us into this? So far, the only lesson anyone learned is that if you frak up hard enough, Uncle Sam will bail you out.

http://www.nytimes.com/2009/03/19/business/economy/19fed.html?hp

This isn't socialism, for that would imply a merit-neutral system of redistribution. This is a kleptocracy of the irresponsible!

I've been pretty hard on Obama about a number of things. I'm not all that upset with Obama in light of this latest torrent of cheap populism, ala Stewart's publicity stunt.

There is a lot of willful misrepresentation and a good helping of public ignorance at work right now. And it's a deadly combination that won't serve us well.

First off, I really dislike Geithner and didn't want him as Treasury Sec. in the first place. Having said that, he had no choice but to "OK" the bonuses. They were pre-existing contracts. The real culprits in this were the Democratic majority Congress + the Bush Admin's Treasury. That's when the seeds of these payouts were laid.

Failed policy and failed leadership. None of which can be honestly laid at the feet of Obama, but also not at the feet of the Congressional Republicans. Odd how this has made partisanship a mere sideshow. The real tragedy is in how woefully uneducated our leadership has become.

Next, I keep reading about "bonuses paid to people who left". Uh, yea. They were retention bonuses. Those people worked up to the contractual date. Then left. That's how retention bonuses work in these sorts of cases. Same as when your company gets bought out. You might know there's no future for you there (whether by your own fault or not is irrelevant). But they need you for some practical reason. The answer is they have to pay you handsomely, put golden handcuffs on you, and you work to fulfill that, get your reward, and move on. I'd love to hear exactly how else our wise leadership or populist schtick peddlers would do it instead. GMAFB.

I do agree with you on infrastructure. Obama should be pushing that hard. The country would accept it. Only those same ideological partisan Republicans who would have us privatize the military and police would be against it. Of course, the partisan Democrats would also screw it up by fighting to load the projects up with bullshit provisions, restrictions and designations.

Obama needs to do what he was overwhelmingly elected to do. Take a stick to Congress. He needs to quit being afraid of the whack-a-mole newly-discovered-neo-libertarian Republicans and the giddy, half rabid Democrats.

Just fix stuff. Nationalize the f'ing banks already. I've yet to find a [true] conservative economist who says otherwise. Build infrastructure. Hell, Japan is building a space elevator. But what do I hear coming out of DC? Increasing calls to shut down NASA so we can instead increase Social Security and Welfare?

Don't get me wrong, I blame Congress and Paulson far more than I blame Obama. I'm just disgusted by Obama's timidity and his faith on Clinton era economic orthodoxy. He didn't create the problem, but he is perpetuating it by providing the banks with further bailouts without accountability. I know he's in a tough spot and that I haven't given him much time to work things out, but so far, he's been a disappointment.

You're a bit hard on Jon Stewart. He's a TV comedian, so of course his treatment of the situation will be shallow and imprecise. The problem is that the mainstream media's treatment of the situation is even more superficial and uninformed.

The Congressional Republicans deserve ample blame. If not for the bailout, then certainly for permitting the economic situation that forced the bailout. They're virulently against any kind of bank nationalization. Their solution for the banks is inaction, which in the short run is worse than bailout.

"Just fix stuff. Nationalize the f'ing banks already. I've yet to find a [true] conservative economist who says otherwise. Build infrastructure. Hell, Japan is building a space elevator. But what do I hear coming out of DC? Increasing calls to shut down NASA so we can instead increase Social Security and Welfare?

WTF? Has everyone lost their mind?"

I think that we as a country just need something to get behind...a rally point if you will. I suggest that we create a space infrastructure in order to save this little guy.

Don't get me wrong either, I have no love lost on Republicans-of-convenience who currently infest Congress. I'm even less tolerant of all this recent neo-libertarianism which the Republicans have picked up on. I heard one on Bill Maher's cable show last week. He invoked Ayn Rand and then went on to spew neo-libertarian crap in the same breath. Uh, jackass, Ayn f'ing hated Libertarians worse than socialists.

I guess I'm at the place where the obstructionist Republicans are irrelevant unless Obama chooses to make them relevant, which so far he has. But there's a catch. He can't let the Dems run rampant either, or that will make the Reps relevant quicker than anything.

Obama needs to step up. Now. Not later. Not after we "give this a chance". People voted for him to change things. I know so many [true] conservatives, Republicans and Objectivists who voted for Obama simply because they wanted to clean house, not because they loved his ideological perspectives.

As it stands now, even if Obama goes down historically as important as FDR, he's going to make all the same mistakes FDR made. I'm reading another history of that era and I'm very stuck by all the similarities, right down to how FDR boxed himself in and only managed through it by getting 4 tries at it. Obama only gets 2, no matter what, so he'd better hurry up.

It appears that I was a bit rash in blaming Geithner for knowledge about AIG's retention bonuses. It is surprising to me since he was supposedly instrumental in creating the AIG bailout. However, I'm still extremely critical of Obama/Geithner/Fed for their handling of the AIG situation. They had too much trust in the good faith of Paulson and AIG execs to safeguard the interests of the American people. (I did too, but not anymore.) They also wanted to keep AIG and the bulge brackets as going concerns, when they should have just pressed for bankruptcy and then stepped in with selective government guarantees.

Neo-Libertarians is the only kind of libertarian I see in the media and they're citing Ayn Rand all the time. So it shouldn't be surprising that Bill Maher would associate the one with the other. If true objectivists have a problem with the association, they need to come forth and make their argument against the association.

In Maher's defense (who I generally like 80% of the time), he wasn't associating with the neo-libertarians. He just had one on as his token right-winger.

The problem with Objectivists is we are few. And there aren't enough of us willing to come out and speak up, at that. I wish this weren't the case, but since most Objectivists are incredibly happy with their own position in life, they are loathe to make trouble for themselves. I've even come across a wing of self-described "objectivists" who are ardent Sarah Palin supporters. Oh, the irony. I wonder what Ayn woulda thought of Sarah.